The successful closure of the US$900 Million transaction for the Azura-Edo Independent Power Plant signifies the emergence of a new phase in Nigeria's power industry. The deal is a first of its kind in many respects. It is the first Independent Power Plant to be built with 100 percent private funding. It is, as well, the first Nigerian power generation project to receive the World Bank Partial Risk Guarantee (WPRG) (worth US$237 million) and also receive insurance from the Multilateral Investment Guarantee Agency (MIGA). Both instruments provide guarantees to the investors (debt and equity) in the event of a premature termination of the project. In light of its trailblazing nature, it becomes imperative to analyze the structure of the transaction which can serve as a future guide to power project development in Nigeria; with particular reference to ensuring commercial viability and project de-risking.
The Azura-Edo IPP is a 450MW open-cycle gas-fired thermal plant located near Benin City in Edo State. It is expected to become operational in 2018. The project represents the first phase of what would ultimately become a 1500 MW power generation plant.
One of the most important aspects of the deal was the signing of the long-term Power Purchase Agreement (PPA) with the Nigeria Bulk Electricity Trading Plc (NBET) which would serve as the off-taker for the electricity generated by the plant. The PPA basically guarantees the commercial viability and bankability of the plant.
Once the commercial viability of the project is determined through the PPA, the need for risk mitigation to address risk factors such as, failure to secure gas to fire the plants, or the early termination of the PPA, becomes inevitable. This was provided principally via three means; The WPRG, the MIGA insurance support, and the Put and Call Option Agreement (PCOA) with the Federal Government.
The WPRG offers cover to the private lenders in the event that the government fails to perform its obligations with respect to the project. We envisage that the WPRG would typically cover the outstanding principal and accrued interest in such a default event (however, payment is made only if the debt service default is caused by risks specified under the guarantee). MIGA basically provides political risk insurance to companies looking to invest in developing countries.
The Put and Call Option Agreement is very interesting and is perhaps one of the more significant innovations of the deal. The PCOA basically allows the promoters of the project to 'put' the plant (or its shares) to the government in the event that the PPA is terminated early. In such an event, the government is obligated to pay a 'purchase price' which, at a minimum, covers the outstanding debt used to finance the construction of the plant.
The foregoing are the highlights of some of the essential features of the Azura deal. The innovative way by which the promoters and their advisers sufficiently dealt with the issue of risk allocation is the major takeaway from the project. Project developers can learn a lot in this regard; it being a common obstacle in the development of many such projects in Nigeria.
On a final note, with the closure of the deal, it seems Nigeria's problems in attracting private financing for major capital-intensive projects, such as power, may soon be resolved. A major solution to our energy crisis remains the ease of attracting private capital investment. Thus, the Azura deal has proved that with a well thought out project structure, right and willing private investors could be attracted to finance and develop our basic infrastructures.
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